PIXELWORKS, INC 10-Q

Item 1. Financial Statements. PIXELWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) September 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 66,559 $ 31,257 Short-term marketable securities — 250 Accounts receivable, net 6,086 4,672 Inventories 1,601 2,445 Prepaid expenses and other current assets 2,002 1,010 Total current assets 76,248 39,634 Property and equipment, net 5,526 5,103 Operating lease right-of-use assets 5,401 6,606 Other assets, net 960 1,081 Acquired intangible assets, net 361 1,207 Goodwill 18,407 18,407 Total assets $ 106,903 $ 72,038 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,765 $ 995 Accrued liabilities and current portion of long-term liabilities 15,075 9,452 Current portion of income taxes payable 457 147 Total current liabilities 18,297 10,594 Long-term liabilities, net of current portion 649 1,007 Deposit liability 9,741 — Operating lease liabilities, net of current portion 3,468 5,088 Income taxes payable, net of current portion 2,090 2,479 Total liabilities 34,245 19,168 Commitments and contingencies (Note 13) Redeemable non-controlling interest 30,288 — Shareholders’ equity: Preferred stock — — Common stock 474,067 467,957 Accumulated other comprehensive income (loss) ( 33 ) 47 Accumulated deficit ( 431,664 ) ( 415,134 ) Total shareholders’ equity 42,370 52,870 Total liabilities, redeemable non-controlling interest and shareholders’ equity $ 106,903 $ 72,038 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents PIXELWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue, net $ 15,196 $ 8,190 $ 38,516 $ 31,217 Cost of revenue (1) 7,211 4,214 19,696 15,417 Gross profit 7,985 3,976 18,820 15,800 Operating expenses: Research and development (2) 6,792 6,062 20,248 18,643 Selling, general and administrative (3) 5,097 4,621 14,847 14,970 Restructuring — 1,430 — 2,022 Total operating expenses 11,889 12,113 35,095 35,635 Loss from operations ( 3,904 ) ( 8,137 ) ( 16,275 ) ( 19,835 ) Interest income (expense) and other, net 54 ( 28 ) 292 2 Total other income (expense), net 54 ( 28 ) 292 2 Loss before income taxes ( 3,850 ) ( 8,165 ) ( 15,983 ) ( 19,833 ) Provision (benefit) for income taxes ( 9 ) ( 26 ) 315 257 Net loss ( 3,841 ) ( 8,139 ) ( 16,298 ) ( 20,090 ) Less: Net income attributable to redeemable non-controlling interest ( 232 ) — ( 232 ) — Net loss attributable to Pixelworks Inc. $ ( 4,073 ) $ ( 8,139 ) $ ( 16,530 ) $ ( 20,090 ) Net loss attributable to Pixelworks Inc. per share - basic and diluted $ ( 0.08 ) $ ( 0.20 ) $ ( 0.32 ) $ ( 0.51 ) Weighted average shares outstanding - basic and diluted 52,768 40,766 52,245 39,697 (1) Includes: Amortization of acquired intangible assets 218 298 681 894 Stock-based compensation ( 138 ) 117 17 345 Restructuring — 166 — 166 (2) Includes stock-based compensation 549 820 1,740 2,274 (3) Includes: Stock-based compensation 1,146 913 2,738 3,296 Amortization of acquired intangible assets 53 76 166 228 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents PIXELWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net loss $ ( 3,841 ) $ ( 8,139 ) $ ( 16,298 ) $ ( 20,090 ) Other comprehensive loss: Foreign currency translation adjustment ( 80 ) — ( 80 ) — Unrealized gain on available-for-sale securities — ( 2 ) — ( 1 ) Comprehensive loss ( 3,921 ) ( 8,141 ) ( 16,378 ) ( 20,091 ) Less: comprehensive income attributable to redeemable non-controlling interest ( 232 ) — ( 232 ) — Total comprehensive loss attributable to Pixelworks, Inc. $ ( 4,153 ) $ ( 8,141 ) $ ( 16,610 ) $ ( 20,091 ) See accompanying notes to condensed consolidated financial statements. 8 Table of Contents PIXELWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 16,298 ) $ ( 20,090 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 4,495 5,915 Depreciation and amortization 2,684 2,754 Amortization of acquired intangible assets 847 1,122 Deferred income tax expense (benefit) ( 5 ) 4 Reversal of uncertain tax positions ( 2 ) ( 10 ) Accretion on short-term marketable securities — ( 6 ) Gain on sale of marketable securities — ( 4 ) Changes in operating assets and liabilities: Accounts receivable, net ( 1,414 ) 5,498 Inventories 844 1,506 Prepaid expenses and other current and long-term assets, net 1,161 2,025 Accounts payable 1,352 ( 162 ) Accrued current and long-term liabilities 3,423 ( 1,742 ) Income taxes payable ( 77 ) ( 41 ) Net cash used in operating activities ( 2,990 ) ( 3,231 ) Cash flows from investing activities: Purchases of property and equipment ( 2,293 ) ( 2,376 ) Proceeds from sales and maturities of short-term marketable securities 250 7,748 Purchases of short-term marketable securities — ( 1,500 ) Purchases of licensed technology — ( 152 ) Net cash provided by (used in) investing activities ( 2,043 ) 3,720 Cash flows from financing activities: Net proceeds from issuance of equity interest to redeemable non-controlling interest 29,976 — Net proceeds from issuance of equity interest to certain entities owned by employees 9,670 — Proceeds from issuance of common stock under employee equity incentive plans 1,282 600 Payments on asset financings ( 926 ) ( 675 ) Net proceeds from "at the market" equity offering 333 3,641 Proceeds from line of credit — 3,954 Proceeds from Paycheck Protection Program loan — 796 Net cash provided by financing activities 40,335 8,316 Net increase in cash and cash equivalents 35,302 8,805 Cash and cash equivalents, beginning of period 31,257 7,257 Cash and cash equivalents, end of period $ 66,559 $ 16,062 Supplemental disclosure of cash flow information: Cash paid for income taxes, net of refunds received $ 374 $ 280 Cash paid during the period for interest 108 172 Non-cash investing and financing activities: Acquisitions of property and equipment and other assets under extended payment terms 958 1,392 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents PIXELWORKS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data) (Unaudited) Common Stock Accumulated Other Comprehensive Income (loss) Accumulated Deficit Total Shareholders' Equity 2021 Shares Amount Balance as of December 31, 2020 51,078,942 $ 467,957 $ 47 $ ( 415,134 ) $ 52,870 Stock issued under employee equity incentive plans 1,133,479 1,063 — — 1,063 Stock-based compensation expense — 1,432 — — 1,432 Net loss — — — ( 8,075 ) ( 8,075 ) Balance as of March 31, 2021 52,212,421 $ 470,452 $ 47 $ ( 423,209 ) $ 47,290 Stock issued under employee equity incentive plans 140,143 — — — — Stock-based compensation expense — 1,506 — — 1,506 Net loss — — — ( 4,382 ) ( 4,382 ) Balance as of June 30, 2021 52,352,564 $ 471,958 $ 47 $ ( 427,591 ) $ 44,414 Stock issued under employee equity incentive plans 813,914 219 — — 219 "At the market" equity offering 61,018 333 333 Stock-based compensation expense — 1,557 — — 1,557 Foreign currency translation adjustment — — ( 80 ) ( 80 ) Net loss attributable to Pixelworks, Inc. — — — ( 4,073 ) ( 4,073 ) Balance as of September 30, 2021 53,227,496 $ 474,067 $ ( 33 ) $ ( 431,664 ) $ 42,370 2020 Balance as of December 31, 2019 38,434,488 $ 436,122 $ 12 $ ( 388,605 ) $ 47,529 Stock issued under employee equity incentive plans 815,375 325 — — 325 Stock-based compensation expense — 1,822 — — 1,822 Unrealized loss on available for sale securities — — ( 6 ) — ( 6 ) Net loss — — — ( 5,399 ) ( 5,399 ) Balance as of March 31, 2020 39,249,863 $ 438,269 $ 6 $ ( 394,004 ) $ 44,271 "At the market" equity offering 803,528 2,474 — — 2,474 Stock issued under employee equity incentive plans 167,100 12 — — 12 Stock-based compensation expense — 2,243 — — 2,243 Unrealized gain on available for sale securities — — 7 — 7 Net loss — — — ( 6,552 ) ( 6,552 ) Balance as of June 30, 2020 40,220,491 $ 442,998 $ 13 $ ( 400,556 ) $ 42,455 "At the market" equity offering 570,989 1,167 1,167 Stock issued under employee equity incentive plans 745,878 263 — — 263 Stock-based compensation expense — 1,850 — — 1,850 Unrealized loss on available for sale securities — — ( 2 ) — ( 2 ) Net loss — — — ( 8,139 ) ( 8,139 ) Balance as of September 30, 2020 41,537,358 $ 446,278 $ 11 $ ( 408,695 ) $ 37,594 See accompanying notes to condensed consolidated financial statements. 10 Table of Contents PIXELWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Unaudited) NOTE 1: BASIS OF PRESENTATION Nature of Business Pixelworks, Inc. (together with our subsidiaries, the “Company”, “we”, “our” or “us”) is a leading provider of high-performance and power-efficient visual processing solutions that bridge the gap between video content formats and rapidly advancing display capabilities. We develop and market semiconductor and software solutions that enable consistently high-quality, authentic viewing experiences in a wide variety of applications from cinema to smartphones. Our primary target markets include Mobile (smartphone, gaming and tablet), Home Entertainment (TV, personal video recorder ("PVR"), over-the-air ("OTA") and projector), Content (creation, remastering and delivery), and Business & Education (projector). As of September 30, 2021, we had an intellectual property portfolio of 334 patents related to the visual display of digital image data. We focus our research and development efforts on developing video algorithms that improve quality, and architectures that reduce system power, cost, bandwidth and increase overall system performance and device functionality. We seek to expand our technology portfolio through internal development and co-development with business partners, and we continually evaluate acquisition opportunities and other ways to leverage our technology into other high-value markets. Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon. On August 2, 2017, we acquired ViXS Systems, Inc., a corporation organized in Canada ("ViXS"). During the third quarter of 2021, we engaged in a strategic plan to re-align our mobile, projector, and video delivery businesses to improve their focus on the Asia-centered customers and employee stakeholders of those businesses. The global center of the mobile, projector, and video delivery businesses continues to be in Asia, and the steps we have taken to date and going forward are intended to improve our ability to access capital, customers, and talent. We have operated our primary R&D center in Asia for over 15 years and feel that the time is right to take advantage of that existing footprint and develop our subsidiary, Pixelworks Semiconductor Technology (Shanghai) Co., Ltd. (or "PWSH") as a full profit-and-loss center underneath Pixelworks, Inc. for the mobile, projector, and video delivery businesses. Most of these steps have been completed or will be completed before the end of 2021. This plan will further enable PWSH to seek qualification to file an application for an initial public offering on the Shanghai Stock Exchange’s Sci-Tech innovAtion boaRd, known as the STAR Market (the “Listing”). We believe that the Listing will have many benefits, including improved access to new capital markets and the funding of its growth worldwide. We presently intend to qualify PWSH to apply for the Listing so that the Listing is consummated in 2023. The process of going public on the STAR Market includes several periods of review and, therefore, is a lengthy process. There is no guarantee that PWSH will be approved for a Listing at any point in the future. Condensed Consolidated Financial Statements The financial information included herein for the three and nine month periods ended September 30, 2021 and 2020 is prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and is unaudited. Such information reflects all adjustments, consisting of only normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of our condensed consolidated financial statements for these interim periods. The financial information as of December 31, 2020 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2020, included in Item 8 of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2021, and should be read in conjunction with such consolidated financial statements. The results of operations for the three and nine month periods ended September 30, 2021 and 2020 are not necessarily indicative of the results expected for future periods or for the entire fiscal year ending December 31, 2021. Recent Accounting Pronouncements In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740 and also clarifies and amends existing guidance to provide for more consistent application. ASU 2019-12 became effective for us on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on our financial position, results of operations and cash flows. 11 Table of Contents In November 2018, the FASB issued Accounting Standards Update No. 2018-18, Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606 ("ASU 2018-18"). ASU 2018-18 requires transactions in collaborative arrangements to be accounted for under ASC 606 if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendment also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. ASU 2018-18 became effective for us on January 1, 2020. The adoption of ASU 2018-18 did not have a material impact on our financial position, results of operations and cash flows. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Our significant estimates and judgments include those related to revenue recognition, valuation of excess and obsolete inventory, lives and recoverability of equipment and other long-lived assets, valuation of goodwill, valuation of share-based payments, income taxes, litigation and other contingencies. The actual results experienced could differ materially from our estimates. NOTE 2: BALANCE SHEET COMPONENTS Accounts Receivable, Net Accounts receivable are contract assets that arise from the performance of our obligation pursuant to our contracts with our customers and represent our unconditional right to payment for the satisfaction of our performance obligations. They are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. Accounts receivable are stated net of an allowance for doubtful accounts, which is maintained for estimated losses that may result from the inability of our customers to make required payments. Accounts receivable consist of the following: September 30, 2021 December 31, 2020 Accounts receivable, gross $ 6,112 $ 4,713 Less: allowance for doubtful accounts ( 26 ) ( 41 ) Accounts receivable, net $ 6,086 $ 4,672 The following is the change in our allowance for doubtful accounts: Nine Months Ended September 30, 2021 2020 Balance at beginning of period $ 41 $ 23 Additions charged (reductions credited) ( 15 ) 4 Balance at end of period $ 26 $ 27 Inventories Inventories consist of finished goods and work-in-process, and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable value). Inventories consist of the following: September 30, 2021 December 31, 2020 Finished goods $ 862 $ 1,775 Work-in-process 739 670 Inventories $ 1,601 $ 2,445 12 Table of Contents Property and Equipment, Net Property and equipment, net consists of the following: September 30, 2021 December 31, 2020 Gross carrying amount $ 22,568 $ 22,291 Less: accumulated depreciation and amortization ( 17,042 ) ( 17,188 ) Property and equipment, net $ 5,526 $ 5,103 Acquired Intangible Assets, Net In connection with the acquisition of ViXS (the "Acquisition"), we recorded certain identifiable intangible assets. Acquired intangible assets resulting from this transaction were assigned to Pixelworks, Inc., and consist of the following: September 30, 2021 December 31, 2020 Developed technology $ 5,050 $ 5,050 Customer relationships 1,270 1,270 Backlog and tradename 410 410 6,730 6,730 Less: accumulated amortization ( 6,369 ) ( 5,523 ) Acquired intangible assets, net $ 361 $ 1,207 Developed technology and customer relationships are amortized over a useful life of three to five years . Backlog was fully amortized as of September 30, 2018 and tradename was fully amortized as of March 31, 2019. Amortization expense for intangible assets was $ 271 and $ 847 for the three and nine months ended September 30, 2021, respectively, $ 218 and $ 681 were included in cost of revenue for the three and nine months ended September 30, 2021, respectively, and $ 53 and $ 166 were included in selling, general and administrative for the three and nine months ended September 30, 2021, respectively, in the condensed consolidated statements of operations. As of September 30, 2021, future estimated amortization expense is as follows: Three months ending December 31, 2021 $ 271 Year ending December 31, 2022 90 $ 361 Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Conditions that would trigger an impairment assessment include, but are not limited to, past, current, or expected cash flow or operating losses associated with the asset. There were no such triggering events requiring an impairment assessment of other intangible assets during the nine months ended September 30, 2021. Goodwill Goodwill resulted from the Acquisition, whereby we recorded goodwill of $ 18,407 . Goodwill is not amortized; however, we review goodwill for impairment annually and whenever events or changes in circumstances indicate that the fair value of the reporting unit may be less than it's carrying value. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in our business climate or a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continued losses or adverse changes in legal factors, regulation or business environment. There were no such triggering events requiring a goodwill impairment assessment during the nine months ended September 30, 2021. We perform our annual impairment assessment for goodwill on November 30 of each year. 13 Table of Contents Accrued Liabilities and Current Portion of Long-Term Liabilities Accrued liabilities and current portion of long-term liabilities consist of the following: September 30, 2021 December 31, 2020 Deferred research and development reimbursement $ 4,542 $ — Accrued payroll and related liabilities 3,895 2,867 Operating lease liabilities, current 2,440 2,039 Current portion of accrued liabilities for asset financings 1,004 786 Accrued interest payable 351 429 Accrued commissions and royalties 251 474 Deferred revenue 20 179 Accrued costs related to restructuring — 630 Other 2,572 2,048 Accrued liabilities and current portion of long-term liabilities $ 15,075 $ 9,452 Deferred research and development reimbursement is related to the Co-Development Agreement discussed in "Note 8: Research and Development". Deferred revenues are contract liabilities that arise when cash payments are received or due in advance of the satisfaction of our performance obligations. Any increase in deferred revenues is driven by cash payments received or due in advance of satisfying our performance obligation pursuant to the contract with the customer. Any decrease in deferred revenues is due to the recognition of revenue related to satisfying our performance obligation. The change in deferred revenue is as follows: Nine Months Ended September 30, 2021 2020 Deferred revenue: Balance at beginning of period $ 179 $ 146 Revenue recognized ( 1,047 ) ( 781 ) Revenue deferred 888 645 Balance at end of period $ 20 $ 10 Short-Term Line of Credit On December 21, 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank (the "Bank"), which has been amended over time, including as recently as December 14, 2020 (as amended, the "Revolving Loan Agreement"). The Revolving Loan Agreement provided a secured working capital-based revolving line of credit (the "Revolving Line") in an aggregate amount of up to the lesser of (i) $ 10,000 , or (ii) $ 2,500 plus 80 % of eligible domestic accounts receivable and certain foreign accounts receivable of both Pixelworks and ViXS Systems, Inc., subject to certain limitations on the amount of accounts receivables attributable to ViXS. In addition, the Revolving Loan Agreement provided for non-formula advances of up to $ 10,000 which may have been made solely during the last five business days of any fiscal month or quarter and which were required to be repaid by us on or before the fifth business day after the applicable fiscal month or quarter end. Due to their repayment terms, non-formula advances did not provide us with usable liquidity. The Revolving Loan Agreement, as amended, contained customary affirmative and negative covenants as well as customary events of default. The occurrence of an event of default could have resulted in the acceleration of our obligations under the Revolving Loan Agreement, as amended, and an increase to the applicable interest rate, and would have permitted the Bank to exercise remedies with respect to its security interest. The Revolving Line had a maturity date of March 26, 2021. We did not renew the Revolving Loan Agreement upon its maturity. As of December 31, 2020, we had no outstanding borrowings under the Revolving Line. 14 Table of Contents NOTE 3: MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS Marketable Securities We had no marketable securities a s of September 30, 2021. As of December 31, 2020, all of our marketable securities were classified as available-for-sale, had contractual maturities of one year or less and consisted of the following: Cost Unrealized Gain (Loss) Fair Value Short-term marketable securities: As of December 31, 2020: Corporate debt securities 253 ( 3 ) 250 $ 253 $ ( 3 ) $ 250 Unrealized holding gains and losses were recorded in accumulated other comprehensive income, a component of shareholders’ equity, in the condensed consolidated balance sheets. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value: Level 1: Valuations based on quoted prices in active markets for identical assets and liabilities. Level 2: Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: Valuations based on unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. The following table presents information about our assets measured at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020: Level 1 Level 2 Level 3 Total As of September 30, 2021: Assets: Cash equivalents: Money market funds $ 18,830 $ — $ — $ 18,830 As of December 31, 2020: Assets: Cash equivalents: Money market funds $ 23,832 $ — $ — $ 23,832 Short-term marketable securities: Corporate debt securities — 250 — 250 We primarily use the market approach to determine the fair value of our financial assets. The fair value of our current assets and liabilities, including accounts receivable and accounts payable approximates the carrying value due to the short-term nature of these balances. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with U.S. GAAP. 15 Table of Contents NOTE 4: RESTRUCTURINGS In August 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "August 2020 Plan"). The August 2020 Plan included an approximately 14 % reduction in workforce, primarily in the areas of operations, research and development, sales and marketing. In January 2020, we executed a restructuring plan to make the operation of the Company more efficient (the "January 2020 Plan"). The January 2020 Plan included an approximately 4 % reduction in workforce, primarily in the areas of research and development and sales. Total restructuring expense included in our condensed consolidated statements of operations for the three and nine month periods ended September 30, 2021 and 2020 is comprised of the following: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Cost of revenue — restructuring: Employee severance and benefits $ — $ 166 $ — $ 166 — 166 — 166 Operating expenses — restructuring: Employee severance and benefits $ — $ 1,430 $ — $ 2,022 — 1,430 — 2,022 Total restructuring expense $ — $ 1,596 $ — $ 2,188 During the three and nine months ended September 30, 2021, we did not record any restructuring expense. During the three months ended September 30, 2020, we recorded $ 1,596 in restructuring expense related to the August 2020 Plan. During the nine months ended September 30, 2020 we recorded $ 1,596 in restructuring expense related to the August 2020 Plan and $ 592 in restructuring expense related to the January 2020 Plan. The following is a rollforward of the accrued liabilities related to restructuring for the nine month period ended September 30, 2021: Balance as of December 31, 2020 Expensed Payments Balance as of September 30, 2021 Employee severance and benefits $ 630 $ — $ ( 630 ) $ — Accrued costs related to restructuring $ 630 $ — $ ( 630 ) $ — 16 Table of Contents NOTE 5: LEASES We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Operating lease ROU assets also exclude lease incentives received. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. We have operating leases for office buildings and one vehicle. Our leases have remaining lease terms of one year to six years . Supplemental information related to lease expense and valuation of the ROU assets and lease liabilities was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Operating lease cost: $ 657 $ 702 $ 1,943 $ 2,024 Nine Months Ended September 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 2,093 $ 2,139 Leased assets obtained in exchange for new operating lease liabilities 629 3,267 Weighted average remaining lease term (in years) 3.09 3.93 Weighted average discount rate 4.93 % 5.06 % Future minimum lease payments under non-cancellable leases as of September 30, 2021 were as follows: Operating Lease Payments Three months ending December 31, 2021 $ 548 Years ending December 31: 2022 2,796 2023 1,372 2024 877 2025 364 2026 364 Thereafter 91 Total operating lease payments 6,412 Less imputed interest ( 504 ) Total operating lease liabilities $ 5,908 As of September 30, 2021, we had no operating lease liabilities that had not commenced. 17 Table of Contents NOTE 6: REVENUE Revenue is recognized when control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our principal revenue generating activities consist of the following: Product Sales - We sell integrated circuit products, also known as “chips” or “ICs”, based upon a customer purchase order, which includes a fixed price per unit. We have elected to account for shipping and handling as activities to fulfill the promise to transfer the goods, and not evaluate whether these activities are promised services to the customer. We generally satisfy our single performance obligation upon shipment of the goods to the customer and recognize revenue at a point in time upon shipment of the underlying product. Our shipments are subject to limited return rights subject to our limited warranty for our products sold. In addition, we may provide other credits to certain customers pursuant to price protection and stock rotation rights, all of which are considered variable consideration when estimating the amount of revenue to recognize. We use the “most likely amount” method to determine the amount of consideration to which we are entitled. Our estimate of variable consideration is reassessed at the end of each reporting period based on changes in facts and circumstances. Historically, returns and credits have not been material. Engineering Services - We enter into contracts for professional engineering services that include software development and customization. We identify each performance obligation in our engineering services agreements (“ESAs”) at contract inception. The ESA generally includes project deliverables specified by the customer. The performance obligations in the ESA are generally combined into one deliverable, with the pricing for services stated at a fixed amount. Services provided under the ESA generally result in the transfer of control over time. We recognize revenue on ESAs based on the proportion of labor hours expended to the total hours expected to complete the contract performance obligation. ESAs could include substantive customer acceptance provisions. In ESAs that include substantive customer acceptance provisions, we recognize revenue upon customer acceptance. License Revenue - On occasion, we derive revenue from the license of our internally developed intellectual property ("IP"). Additionally, for certain IP license agreements, royalties are collected as customers sell their own products that incorporate our IP. IP licensing agreements that we enter into generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Fees under these agreements generally include license fees or royalty fees relating to our IP and support service fees, resulting in two performance obligations. We evaluate each performance obligation, which generally results in the transfer of control at a point in time for the license fee and over time for support services. Royalties are recognized as revenue is earned, generally when the customer sells its products that incorporate our IP. Other - From time-to-time, we enter into arrangements for other revenue generating activities, such as providing technical support services to customers through technical support agreements. In each circumstance, we evaluate such arrangements for our performance obligations which generally results in the transfer of control for such services over time. Historically, such arrangements have not been material to our operating results. The following table provides information about disaggregated revenue based on the preceding categories for the three and nine months ended September 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 IC sales $ 14,347 $ 7,968 $ 36,038 $ 29,926 Engineering services, license and other 849 222 2,478 1,291 Total revenues $ 15,196 $ 8,190 $ 38,516 $ 31,217 For segment information, including revenue by geographic region, see "Note 11: Segment Information". Our contract balances include accounts receivable and deferred revenue. For information concerning these contract balances, see "Note 2: Balance Sheet Components". Payment terms and conditions for goods and services provided vary by contract; however, payment is generally required within 30 to 60 days of invoicing. 18 Table of Contents We have not identified any material costs incurred associated with obtaining a contract with a customer which would meet the criteria to be capitalized, therefore, these costs are expensed as incurred. The aggregate amount of the transaction price allocated to unsatisfied performance obligations with an original expected duration of greater than one year is $ 60 , which we expect to recognize ratably over the next 6 months . NOTE 7: INTEREST INCOME AND OTHER, NET Interest income and other, consists of the following: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Other income $ 40 $ 34 $ 233 $ 114 Interest expense ( 14 ) ( 71 ) 21 ( 193 ) Interest income 28 9 38 81 Total interest income and other, net $ 54 $ ( 28 ) $ 292 $ 2 NOTE 8: RESEARCH AND DEVELOPMENT During the third quarter of 2021, we entered into a best-efforts co-development agreement with a customer to defray a portion of the research and development expenses we expect to incur in connection with our development of an integrated circuit product. We expect our development costs to exceed the amounts received from the customer, and although we expect to sell units of the product to the customer, there is no commitment or agreement from the customer for such sales at this time. Additionally, we retain ownership of any modifications or improvements to our pre-existing intellectual property and may use such improvements in products sold to other customers. Under the co-development agreement, $ 5,800 was payable by the customer within 60 days of the date of the agreement and three additional payments of $ 2,200 , $ 1,300 and $ 1,300 are each payable upon completion of certain development milestones. As amounts become due and payable, they are offset against research and development expense on a pro rata basis. During the third quarter of 2021, we recognized an offset to research and development expense of $ 1,300 . NOTE 9: INCOME TAXES The provision for income taxes during the 2021 and 2020 periods is primarily comprised of current and deferred tax expense in profitable cost-plus foreign jurisdictions, accruals for tax contingencies in foreign jurisdictions and benefits for the reversal of previously recorded foreign tax contingencies due to the expiration of the applicable statutes of limitation. We recorded a benefit for the reversal of previously recorded foreign tax contingencies of $ 2 and $ 10 during the first nine months of 2021 and 2020, respectively. As we do not believe that it is more likely than not that we will realize a benefit from our U.S. net deferred tax assets, including our U.S. net operating losses, we continue to provide a full valuation allowance against essentially all of those assets, therefore, we do not incur significant U.S. income tax expense or benefit. We have not recorded a valuation allowance against our other foreign net deferred tax assets, with the exception of Canada and China, as we believe that it is more likely than not that we will realize a benefit from those assets. As of September 30, 2021 and December 31, 2020, the amount of our uncertain tax positions was a liability of $ 1,661 and $ 1,610 , respectively, as well as a contra deferred tax asset of $ 1,258 and $ 1,189 , respectively. A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitation. Settlement of any particular position could require the use of cash. If the uncertain tax positions we have accrued for are sustained by the taxing authorities in our favor or if the statute of limitation expires, the reduction of the liability will reduce our effective tax rate. We reasonably expect reductions in the liability for unrecognized tax benefits and interest and penalties of approximately $ 138 within the next twelve months due to the expiration of statutes of limitation in foreign jurisdictions. We recognize interest and penalties related to uncertain tax positions in income tax expense in our condensed consolidated statements of operations. 19 Table of Contents NOTE 10: EARNINGS ( LOSS) PER SHARE The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net loss $ ( 3,841 ) $ ( 8,139 ) $ ( 16,298 ) $ ( 20,090 ) Less: Net income attributable to redeemable non-controlling interest ( 232 ) — ( 232 ) — Less: Net income attributable to certain entities owned by employees ( 104 ) — ( 104 ) — Net loss attributable to Pixelworks Inc. - for purposes of earnings per share calculation $ ( 4,177 ) $ ( 8,139 ) $ ( 16,634 ) $ ( 20,090 ) Weighted average shares outstanding - basic and diluted 52,768 40,766 52,245 39,697 Net loss attributable to Pixelworks, Inc. per share - basic and diluted $ ( 0.08 ) $ ( 0.20 ) $ ( 0.32 ) $ ( 0.51 ) Basic and diluted earnings (loss) per share was computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. The numerator adjustments include an allocation of PWSH income to the redeemable non-controlling interests and the employee owned entities. The equity interest associated with the employee-owned entities are considered participating securities at PWSH and will be allocated income, however, they are not required to fund losses, and therefore, no allocations of losses will be made to the employee owned entities in periods of loss at PWSH. Potentially dilutive common shares from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the employee stock purchase plan. The following shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Employee equity incentive plans 3,842 3,732 3,727 3,836 20 Table of Contents NOTE 11: SEGMENT INFORMATION We function as a single operating segment: the design and development of integrated circuits for use in electronic display devices. The majority of our assets are located in the United States and China. Geographic Information Revenue by geographic region, is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Japan $ 7,718 $ 5,296 $ 18,676 $ 21,297 China 6,670 2,045 16,719 5,850 Taiwan 582 120 1,625 1,019 United States 176 384 1,359 2,483 Korea 50 275 66 308 Europe — 70 71 260 $ 15,196 $ 8,190 $ 38,516 $ 31,217 Significant Customers The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented 10% or more of revenue in at least one of the periods presented, is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Distributors: All distributors 57 % 50 % 55 % 51 % Distributor A 28 % 5 % 28 % 4 % Distributor B 13 % 24 % 11 % 28 % Distributor C 13 % 5 % 9 % 3 % End customers: 1 Top five end customers 82 % 68 % 78 % 61 % End customer A 37 % 40 % 36 % 38 % End customer B 28 % — % 22 % — % End customer C 11 % 4 % 8 % 3 % End customer D — % 10 % — % 6 % 1 End customers include customers who purchase directly from us, as well as customers who purchase our products indirectly through distributors. The following accounts represented 10% or more of total accounts receivable in at least one of the periods presented: September 30, 2021 December 31, 2020 Account X 57 % 39 % Account Y 17 % 20 % 21 Table of Contents NOTE 12: RISKS AND UNCERTAINTIES Concentration of Suppliers We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. We rely on a limited number of foundries and assembly and test vendors to produce all of our wafers and for completion of finished products. We do not have any long-term agreements with any of these suppliers. In light of these dependencies, it is reasonably possible that failure to perform by one of these suppliers could have a severe impact on our results of operations. Additionally, the concentration of these vendors within Taiwan and the People’s Republic of China increases our risk of supply disruption due to natural disasters, economic instability, political unrest or other regional disturbances. Risk of Technological Change The markets in which we compete, or seek to compete, are subject to rapid technological change, frequent new product introductions, changing customer requirements for new products and features, and evolving industry standards. The introduction of new technologies and the emergence of new industry standards could render our products less desirable or obsolete, which could harm our business. Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist of cash equivalents and accounts receivable. We limit our exposure to credit risk associated with cash equivalent balances by holding our funds in high quality, highly liquid money market accounts. We limit our exposure to credit risk associated with accounts receivable by carefully evaluating creditworthiness before offering terms to customers. NOTE 13: COMMITMENTS AND CONTINGENCIES Indemnifications Certain of our agreements include indemnification provisions for claims from third parties relating to our intellectual property. It is not possible for us to predict the maximum potential amount of future payments or indemnification costs under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. We have not made any payments under these agreements in the past, and as of September 30, 2021, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however, such obligations could materially impact our results of operations. Legal Proceedings We are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these matters are subject to inherent uncertainties and our view of these matters may change in the future. Other Contractual Obligation As part of the Acquisition, we acquired debt associated with an agreement with the Government of Canada called Technology Partnerships Canada ("TPC"). As part of the TPC agreement, ViXS Systems, Inc. was provided funding to assist in research and development expenses of which a portion was later required to be repaid because the conditions for repayment were met. The scheduled payments are made on a quarterly basis and end in January 2024. As of September 30, 2021, $ 503 is included in accrued liabilities and current portion of long-term liabilities in our condensed consolidated balance sheets and $ 113 is included in long-term liabilities, net of current portion in our condensed consolidated balance sheets. 22 Table of Contents NOTE 14: REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY INTEREST OF PWSH SOLD TO EMPLOYEES During the third quarter of 2021, Pixelworks, Inc. and our subsidiary, PWSH, entered into a Capital Increase Agreement with certain private equity and strategic investors based in China (collectively, the “Investors”) and certain entities which collectively are owned by approximately 75 % of the employees of PWSH and its subsidiaries (collectively, the “ESOP”). The ESOP entities do not qualify as Employee Share Ownership Programs under IRC 4975(e)(7), but function as a qualified ESOP and hold an equity ownership in trust for employees. The Investors invested approximately $ 30,844 in exchange for a redeemable non-controlling equity interest of 10.45 % of PWSH. The Investors will have a liquidation preference in PWSH, a right to co-sell their interest in PWSH along with the Company on the same terms and conditions as the Company, a right to participate on a pro rata basis in any future financing rounds of PWSH, and the Company’s agreement while it remains an owner of PWSH and for two (2) years thereafter to not compete with the business of PWSH, nor solicit or otherwise cause any of PWSH’s core employees or customers to end their relationship with PWSH. These rights all expire upon initial public offering on the STAR Market. Each Investor has the right to require PWSH to redeem the entire equity interest held by such Investor, at the original purchase price paid plus 3 % annual interest, if PWSH does not consummate an initial public offering on the STAR Market on or before June 30, 2024. Based on this contingency, the initial carrying amount of the redeemable non-controlling interests was recorded at fair value on the date of issuance of PWSH equity interests, net of issuance costs and presented in temporary equity on the condensed consolidated balance sheets. The Company has elected to accrete changes in the redemption value of the redeemable non-controlling interests from the issuance date through the earliest redemption date of June 30, 2024 using the interest method. Because the redeemable non-controlling interest is denominated in RMB, it will be revalued to USD at the end of each reporting period, with the changes in carrying value attributable to foreign currency being reflected within accumulated other comprehensive income on the condensed consolidated balance sheets. The ESOP entities invested approximately $ 9,670 in exchange for a redeemable non-controlling equity interest representing 4.68 % of PWSH, which includes a discount of 30 % from the valuation paid by the Investors. Each of the ESOP entities has the right to require PWSH to redeem the entire equity interest held by such ESOP entities at the original purchase price paid plus 5 % annual interest, if PWSH does not achieve its Listing on or before December 31, 2024. Because the ESOP entities are owned by employees of PWSH and its subsidiaries and employees are required to render service until either the initial public offering on the STAR Market or repurchase date, the equity interest owned by the ESOP entities will be accounted for under ASC 718 (Compensation - Stock Compensation). The initial carrying amount of the investment has been recorded as a long-term deposit liability on the condensed consolidated balance sheets as the initial public offering cannot be considered probable at this time. We will recognize the periodic interest component of the award as compensation expense and accrete the long-term deposit liability to its redemption value as of December 31, 2024. Because the long-term deposit liability is denominated in RMB and is considered a monetary liability as defined in ASC 255 (Changing Prices), it will be revalued to USD at the end of each reporting period, with the changes in carrying value recorded as foreign currency gain/loss in our condensed consolidated statements of operations. The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. There can be no assurances that PWSH will complete the Listing by June 30, 2024, or at all. In the event Pixelworks, Inc. is required to redeem the entire equity interest held by the Investors or the ESOP entities,, we may be required to seek additional capital in order to redeem their PWSH shares and there would be no assurances that such capital would be available on terms acceptable to us, if at all. Any redemptions could have a material adverse effect on our business, financial condition and results of operations. The listing of PWSH on China's STAR Market will not change our status as a U.S. public company. The components of the change in redeemable non-controlling interests for the nine months ended September 30, 2021 are presented in the following table (in thousands): Carrying Value of Redeemable NCI as of January 1, 2021 $ — Increase in non-controlling interest due to issuance of stock 30,844 Closing costs incurred ( 868 ) Net income attributable to redeemable non-controlling interest 232 Effect of foreign currency translation attributable to redeemable non-controlling interest 80 Carrying Value of Redeemable NCI as of September 30, 2021 $ 30,288 23 Table of Contents